Australasian Science: Australia's authority on science since 1938

Putting a Price on Carbon

By AusSMC

Experts answer questions about the carbon trading scheme announced by the Australian government.

Which countries have set a carbon price, and is Australia leading the way or catching up?
Our trading partners, including the European Union, China, Korea and Japan, and a number of states of the US, are pricing or are moving to price carbon. They are doing this by various policy measures including regulation, subsidies on consumption of non-carbon-polluting technologies such as solar PV panels, subsidies on the production of non-carbon-polluting technologies, subsidies on research and development related to green technologies, and pricing schemes such as a cap-and-trade emissions trading scheme (ETS).

For Australian industry to remain competitive, we also need to be pricing carbon. The real question is: what type of policy will move the carbon price in Australia as quickly as possible to international carbon price levels? This is a critical question because Australia risks getting left behind in the international marketplace unless our carbon price quickly moves to international price levels.

Many countries have used a combination of the above policies. The real question for each country, including Australia, is what is the appropriate policy to move the country into a world of new, non-carbon-polluting technologies, and keep the country competitive in an environment in which all of our major trading partners are pricing carbon.

Economic analysis has not completely answered this question. Nevertheless the research that has been completed gives a strong indication that the best policy is a cap-and-trade emissions trading scheme.
Prof Kevin Parton, Institute for Land, Water and Society, Charles Sturt University

What is the price likely to be?
The current traded price of carbon in Europe is around A$S22/tonne. It seems probable that the initial fixed carbon price in Australia will be considerably less than this in order to make the policy more politically acceptable. The fact that international offsets will not be permitted under the current Australian government proposal also supports the notion that the carbon price will be considerably below international levels.

In terms of economic efficiency, moving more quickly to an ETS, with prices free to adjust to international levels, is preferred to the current proposal of the government, which has a fixed price initially with an ETS 3–5 years later. Immediate movement to international carbon price levels has the advantage of providing the incentive for Australian industry to be more competitive in the international economy.
Prof Kevin Parton, Institute for Land, Water and Society, Charles Sturt University

How much of an impact has carbon pricing had on emissions in other countries?
The EU's Phase 1 was experimental and not intended to reduce carbon emissions much. Phase 2 is, but it hasn't started yet. The best example in the past was the cap-and-trade scheme for sulphur dioxide in the US, and it was very successful.
Prof John Foster, UQ Energy Economics and Management Group, the University of Queensland

In an emissions trading scheme, price has no impact on reducing emissions. It’s the other way around. The level of emissions is set by government up front, and this determines what the price ends up being.
Prof David Pannell, Centre for Environmental Economics and Policy, University of Western Australia

This is a difficult question to answer, because it is difficult as yet to disentangle the effects of the policy from other influences on carbon emissions. One major exacerbating factor has been the global financial crisis that has restricted growth in some advanced economies and hence reduced their greenhouse gas emissions below what they would otherwise have been. Thus in Europe there has been a slowing in greenhouse gas emissions at the time that an ETS has been introduced, but this can’t be attributed to the ETS.
Prof Kevin Parton, Institute for Land, Water and Society, Charles Sturt University

What alternatives to carbon pricing are in place in other countries, and how successful are they in reducing carbon emissions?
An alternative is sustained subsidies for investments in renewables. Examples of success are Germany and Denmark. But this has to be paid out of general taxation, unlike a cap-and-trading scheme which redistributes from polluters to non-polluters.

Another alternative is a carbon tax. Being an explicit tax, most governments have shied away from it despite its simplicity and the certainty that it offers businesses.

A problem with it is that it is hard to know what the emission reduction effect will be. With cap-and-trade this is known, and it is the price that is uncertain.
Prof John Foster, UQ Energy Economics and Management Group, the University of Queensland

In the European Union, the principal policy is an ETS on the grounds of political expediency among the member states. In Australia, an ETS is probably the best policy on the grounds of both economic efficiency and because other policies make little sense for a small economy.
Prof Kevin Parton, Institute for Land, Water and Society, Charles Sturt University